What Will Happen to Businesses When Energy Cost Eclipses Labor Cost?

Today the cost of labor is the biggest single cost element for many businesses, and drives most decisions. The rise of fossil fuel prices will not be smooth,  however, as we have seen in 2008, when oil prices doubled in a matter of months and then fell back to 30% of their peak in a few months more.  During these spikes, and in the longer term as fossil fuel sources become more difficult and costly to extract, energy costs will rise to a level that challenges or surpasses labor as the biggest component of cost for many or most businesses.  The law of supply and demand also kicks in as population continues to expand, and labor costs in many industries will fall as increasing numbers of people are seeking those jobs.  At the same time, rising energy costs will reduce or eliminate the advantage of manufacturing in “low cost countries” such as China.  How will businesses react?  Will the net effect be to cause people to generally live at a lower economic level and make less money for equivalent work compared with today?  Will manufacturing of progressively lower cost and higher margin goods return to the developed countries?

There are many questions economists should be considering related to future energy costs. With a high probability that fossil fuels will not be adequately substituted before their inevitable scarcity drives costs much higher, energy cost will become the major component of cost in many industries.  This will combine with overpopulation which, in itself, suggests that an increased labor supply and demand for jobs will depress compensation, though not in all industries at the same time.  Will this devalue the worker in the overall picture of corporate strategy?  Will we return to a Dickensian world of sweatshops and poor working conditions, especially in large scale manufacturing?

Immigration will most likely increase with overpopulation and resulting poverty. It is unlikely that transportation systems will be hindered enough by rising energy costs to limit the amount of immigration, illegal or otherwise, from poorer countries to wealthier economies.  It’s also unlikely that the construction of walls and fences or increases in border patrols will stem the growing flow of illegal immigrants into economies already short on low-wage workers.  Given that these people generally come from areas with poorer educational systems, their impact will initially be on the least skilled jobs, as is the case today.  As times get tougher, however, increasingly well-educated people will be part of such movements, and this will increase the downward pressure on wages from the supply side.

Conservation efforts will increase with higher energy costs. While I doubt we will see factory equipment being run by teams of workers turning cranks or running on treadmills any time soon, sufficiently high energy costs and low labor costs could create just such a scenario.  A century ago farm equipment was still often powered by animal labor, such as oxen turning turnstiles, in what are today the most advanced countries.  Since then such practices have been eliminated by cheap and plentiful fossil fuels in all but the poorest parts of the world, but that doesn’t mean that such practices won’t return.  After all, an animal (or human) needs only food, water, and shelter to generate power – no petroleum is required.  Food grows readily in most parts of the world in one form or another, water is still not terribly expensive yet in most places, and basic shelter can be built from renewable resources with little fossil fuel input (as it was a century ago), though it might not meet the expectations of today’s Americans or Europeans.

Perhaps fortunately, going back to the past is not an option. Luckily for us, scientists have developed many advanced technologies that provide much more value than cost.  Many such technologies can be sustained in the future because they leverage huge value from very minimal environmental impact.  Computers, for example, while creating ecologically-damaging byproducts in their manufacture, have an impact on our understanding of our world and our ability to collaborate and manage the situation that goes far beyond their environmental cost.  Given the continuing advances in miniaturization and energy efficiency I can see a time ahead when even street lights will be computer controlled and networked to only give light when there is nearby movement or other indication (thermal signature?) that would indicate the need for light.  Much of the technology we need to effectively conserve resources exists today, but hasn’t yet been synthesized into products we will need in the future.

Our ability to invent depends on good public education systems. Public education was created, or at least greatly increased, during the industrial revolution of the 19th century to address the need for more skilled factory workers.  I believe it played as much a key role in the economic success of the United States as the country’s abundance of natural resources.  Higher average levels of education typify lower birthrates (which are needed) and higher levels of productivity and innovation (which we also need).  This indicates that improved education, especially in the poorest countries, is one of the most cost effective ways to move the world towards sustainability and counter the impact of rising energy costs while also reducing immigration problems.

The future will be different than anything in the past, and it is up to us to make it better. We must steer our civilization towards sustainability and independence from fossil fuels, and develop plans to reduce the global human population now if we are to remain at least somewhat comfortable over the coming decades and ensure good lives for our descendants a century from now.  I urge you to continue to learn, think, and communicate with your government representatives and policy makers on this important topic.

As always, I welcome your comments.  – Tim


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